With UBS as Bookrunner, Haohai Biotech Goes Public on Star Market
COVID-19 and China
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Hong Kong-listed company Haohai Biological Technology (昊海生科, 6826:HK, 688366:SH) has confirmed its intention to launch a second public offering, this time on the Shanghai Stock Exchange Sci-Tech Innovation Board, known as the Star Market (read more about China’s new tech venue in the latest EqualOcean report – download).

According to the prospectus it filed with the regulatory authority, Haohai plans to raise CNY 1.59 billion (USD 224.46 million) through the fresh stock allocation, which is projected to boost the firm’s market capitalization to CNY 15.87 billion (USD 2.25 billion).

There is more to this dual-listing story than meets the eye: for the first time, a non-Chinese organization is involved in the Star board IPO process as the lead underwriter. Swiss multinational investment bank UBS Group AG (UBS:NYSE) has formally offered to assist the biotech firm in its quest to list on the biggest bourse on China’s mainland.

Shanghai-based Haohai develops, manufactures and markets non-toxic materials that can be absorbed by the human body. Mainly used in surgeries, its products are essential for wound care, ophthalmology, medical aesthetics and several other subfields of applied medicine.

Well-positioned across a handful of industry segments, the firm retains a strong presence in China. For one, its share of the local ophthalmic viscoelastic materials market has been hovering above 40% over the past 12 years. It is also the country’s largest producer of recombinant human epidermal growth factor (EGF), which is widely applied to stimulate the proliferation of epithelial and epidermal cells, and the undisputed leader in the medical chitin (used in surgeries as well as in burn and wound treatment) market.

Though the company’s core business is knowledge-intensive, both the amount of labor and capital allocated to research and development are below the Star Market’s average: only 202, or 16.48%, of its 1,226 full-time employees are involved in the innovation drive. Meanwhile, R&D expenses accounted for 5.49%, 5.64% and 6.12% of Haohai’s operating income in 2016, 2017 and 2018 respectively. Low spending on research might be harmful to the firm's competitive position in the harsh biotech market.

Other risks come from the regulatory side. China’s healthcare system is famous for its complexity, which is further exacerbated by the country’s labyrinthine, clumsy administrative structure. What's more, the state bodies responsible for overseeing the sector often keep a tight grip on it, modifying the industry standards down to the smallest of details, including pricing and licensing procedures (read more about the role of the government in China's healthcare services system in our research report).

The biotech industry is recently on the upswing in China, with numerous small- and mid-sized enterprises taking their places among companies traded on the newly established sci-tech board. Chipscreen Biosciences (688321:SH), for instance, raised CNY 102.15 million (USD 14.45 million) through its IPO in early August and then was reportedly trading at over 1,270 times its earnings.

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